Mashreq Capital sees lower yields aiding stocks

Tightening spreads and lower yields in the Gulf Arab region might bring risk-seeking investors back into equities eventually, but any change will be gradual, the CEO of Mashreq Capital said on Monday.

Debt markets in the region have seen a significant recovery in recent weeks with a wave of issues from sovereign and corporate entities, while stock markets remain off the radar of institutional investors, with limited inflows this year.

But that could soon change as valuations go back to normal and debt yields begin to shrink.

“As credit spreads and yields decline, which they are doing very rapidly, you might get investors who are risk loving and want higher returns start looking away from debt and into the equity markets,” Abdul Kadir Hussain said at the Reuters Middle East Investment Summit in Dubai.

“Its not going to come back overnight but I think the signs are there,” he said.

The yield on Dubai paper maturing in 2014 has come down to 6.4 percent from a high of 10 percent in February, Reuters data showed.

Valuations in the debt markets are beginning to be less attractive, while equities, despite being perceived as risky “frontier” markets by investors, has an edge when it comes to pure fundamentals, Hussain said.

“A year ago if you asked me as an investor where would I put my marginal dollar … I would have overwhelmingly said debt. Today if you asked me that question I am biased a little bit more towards equity than debt,” he said.

Nevertheless the problems in the regional equity markets are still many, the executive said, adding that the fragmented nature of the markets and the lack of transparency and corporate governance were all factors deterring investor interest.

“The depth of equity markets in this region continues to be an issue,” Hussain said.

Coupled with that, a global-wide search for yield among investors is helping attract more money toward debt instruments in the region from international investors.

Perceived as being high risk, debt issuers in the region, have had to offer higher yields. To add to that, debt markets are seen to be more global in nature than equities, which has also helped attract flows.

“The debt markets are essentially, global markets. So by definition they are going to be a lot deeper and transparent,” Hussain said.